Daily Economic Commentary: Japan

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Daily Economic Round up of data from Japan!

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The yen was the biggest loser in yesterday’s trading session as it fell sharply versus both the dollar and the euro. Positive data that came out of Japan gave a nice background for risk appetite to slightly pop its head back into the market.

Household spending surprised when it showed that spending increased by 0.3% instead of the 1.5% decline initially expected. Employee earnings were slightly less bad when it printed a 2.9% decline in earnings. The forecast was at -3%. The manufacturing purchasing mangers’ index shared the same somewhat positive tone. It came out at 48.2, an improvement from last reporting period’s 46.6.

The Tankan manufacturing index is due today at 11:50 pm GMT. This could potentially cause some waves in the foreign exchange market because it deals with Japan’s main industry – the manufacturing industry. The survey attempts to assess whether the country’s manufacturing industry is improving or worsening by using a positive/negative scale. A reading above 0 means that conditions are improving. Economists are expecting the survey to print -43.

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The Tankan index, which is one of the most-awaited major economic reports from Japan, wasn’t as strong as expected. The manufacturing index rose from -58 to -48 and failed to meet expectations at -43. Meanwhile, the non-manufacturing index climbed from -31 to -29, which is slightly lower than the consensus at -26. Consolidation was seen among JPY crosses in anticipation of this report. However, no large spikes took place after the release of the weaker-than-expected numbers.

Only the nation’s monetary base is due today. This report, which measures the change in the total quantity of domestic currency in circulation and in banks’ deposits, is not particularly market-moving. However, it is correlated with interest rates since an increasing supply of money leads to additional spending and investment. Later on, this contributes to inflation which may cause the central bank to raise interest rates. An increase of 8.1% is expected to follow the previous reading of a 7.9% uptick.

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The USD/JPY hit the ceiling near the psychologically significant 97.00 level yesterday before sliding lower. Slight improvements in US employment data allowed the JPY to regain ground against the USD towards the end of the day. Prior to this, the highly-anticipated economic data from Japan, the Tankan manufacturing report, gave the JPY a slightly weaker tone as it indicated that economic prospects are not as bright.

The Tankan manufacturing index rose from -58 to -48, falling short of forecasts at -43. The non-manufacturing index also failed to meet expectations at -26 as it inched from -31 to -29. Components of the report show that businesses plan to continue cutting down on spending and investment, implying a bleaker outlook for earnings and employment.

No economic reports are due until the end of the week. The JPY could sustain this weak tone for the rest of the day as demand for riskier assets rises ahead of the US NFP report.

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Yesterday was a huge day for the JPY as it bullied all of the other so-called currency big boys to submission. The JPY managed to take out most or all of its losses for the past 5 days. A bearish engulfing candle (the most recent long candle (red) that towers over the green ones) is now noticeable in the daily charts of the samurai pairs.

Given the JPY’s strength, one might suspect that something spectacular happened in Japan yesterday. This was not the case, however, since Japan just sat on the sidelines yesterday in terms of economic reports. The events in the US (huge unexpected NFP unemployment change, etc) led investors back to the safety of Yellowstone’s and Akkido’s caves. The JPY surged as a result of the panic in the US.

No economic reports are due in Japan today. The US will also have a break today to celebrate its independence day. Trading of the JPY will be limited and constrained, in my opinion, for these reasons.

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Yen trading was particularly reserved, just like most major currencies, as the US heads into its long Fourth of July weekend... Versus the dollar, the yen closed the week at 96.15 price level from its 95.81 open during the Asian session. Japan’s economic cupboard was completely bare last Friday, which also muted any movement in the currency’s price action.

No hard market-hitting economic data ahead this week. Because of this, the yen’s price action in the foreign exchange market would most likely be determined by degrees in risk appetite as well as the underlying fundamental background of currencies pitted against it. In any case, we will see Japan’s leading index for May later at 5 am GMT. The forecast currently stands at 77.00%, slightly higher than last reporting period’s 76.2%.

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Early yesterday, we saw a mad dash to safety as the yen rallied strongly during the Asian and European session. The USDJPY pair opened at 96.15 and dropped as low as 94.67, before finally closing at 95.34. It appears that risk aversion continued to be the dominant market theme, as recent news has caused traders to finally see that global economic recovery will slow.

Japan’s Leading Indicators index was released yesterday, and had a reading of 77% for the month of May. This was in line with expectations and was an increase from previous month’s score of 76.2%. The report indicated that while the recession is easing in all 9 regions of Japan, conditions still remain severe. Economists believe that there will still be some instability as companies cut costs by lowering production and payrolls.

Later today, the Core Machinery Orders m/m is due at 11:50 pm GMT. Take note that machinery orders play a significant role in the Japanese economy. If orders rise, it signals that manufacturing activity will pick up. The forecast is that orders rose 2.3% last May. Also due later at 11:50 pm are the Bank Lending y/y and Current Account reports.

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Safe-haven currencies, such as the USD and JPY, gained the upper hand as the market shifted back to risk aversion mode. Despite the lack of economic reports from Japan yesterday, the USD/JPY sank to the 95.00 mark as the USD faces threats of diversification in the G8 summit.

Core machinery orders were just reported to have slumped by 3% in June. Analysts expected this indicator to post an improvement of 2.3% after sinking by 5.4% in May. Japan's current account surplus widened marginally from 0.97 trillion to 1.02 trillion, as the global downturn eroded demand for its exports.

Later on today, the Economy Watchers Sentiment index will be released. The reading is expected to climb from 36.7 to 38.1 on hopes for a sustained economic recovery for the Asian nation. The actual figure is due at 6:00pm GMT.

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The JPY surged “like crazy” as market participants started to digest the global economy’s previously ignored substandard fundamentals. The JPY has been taking the role of a “safe haven” alone to itself and away from the USD as market participants begin to worry regarding the swell in US debt. The JPY took away more than 100 pips from the USD in just about an hour during the mid-part of the US session as investors exhibited their concerns.

The Economy Watchers Sentiment index which was reported yesterday came in at 42.2. The index was only expected to reach the 38.1 mark after registering a reading of 36.7 during the month prior. The index measures optimism among consumers and is based on about 2,000 surveys regarding the relative level of current economic conditions of workers. A score below 50 indicates pessimism. However, the improvement in the figure gave additional juice to the rise of the JPY.

No top tier economic reports are scheduled today in Japan. We might see further strength in the JPY if risk aversion in the global market persists.

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JPY trading was mixed yesterday as the high-yielders staged a nice rally across the boards. Versus the USD, the JPY remained particularly range bound and just bounced a 130-pip range. Against the EUR, the JPY loss was pronounced as it lost almost 300 pips from its Asian session open price.

Economic data that came out of Japan wasn’t really given any attention to by traders. In any case, the report on preliminary machine tool orders showed that orders dropped by 73.1% in last June from the same month the year prior. The corporate goods price index y/y for June, which measures the average change in price by goods sold by corporations, printed a 6.6% decrease.

No economic data due for today. Still, don’t be certain that the boards will be quiet. It’s the end of the week and traders will be closing their books. With the G8 meetings underway, it would be prudent to expect some volatility as the foreign exchange markets close.